One of the key principles of microfinance is that, poor people need not only credit, but also financial services more importantly savings just like everyone else. This paper will provide a general overview of the literature review on savings mobilization in the context of microfinance industry.
The paper focuses on the possible role of savings in microfinance institutions and the various mechanisms to mobilize savings among the poor people who cannot access any kind of financial services. It highlights the critical need for the clients to save and for the institutions to collect savings for the continued growth and expansion of the microfinance sector.
INTRODUCTION
The provision of financial services to micro-entrepreneurs became increasingly popular since the 1990's and early successful microfinance institutions (MFIs) such as the Grameen Bank in Bangladesh and Bancosol in Bolivia, have harvested the benefits of providing financial services to low-income entrepreneurs. This is evidenced by their financial growth over the years. The provision of microfinance was mainly credit services. Traditionally, most of the attention within the microfinance industry has focused on the provision of credit and showed little interest in mobilizing savings.
Microfinance is defined as the sustainable supply of small-scale financial services such as credit, savings accounts, and insurance to poor and low-income people. Microfinance institutions (MFIs), in turn, are the banks/organizations providing these financial services and, today, most of them operate on a non-commercial basis.
There was no focus to mobilize savings because MFIs were heavily subsidized by donor funds, hence, less incentive to build capital from savings. It is generally acknowledged that households will save in financial institutions if the institutions are well structured and offer the clients savings products that meet their specific needs (Robinson, 2004, Robinson and Wright, 2002, Fiebig et al, 1999). If demand-oriented savings facilities are offered by an MFI, it may achieve a level of outreach and impact that credit oriented MFIs cannot achieve (Fiebig et al, 1999). Also, it was thought that poor people were too poor to save. However, there is evidence that even poor people are keen to save if given the opportunity (Robinson, 2004). Christen and Drake (2000) notes that few MFIs have reached financial self-sufficiency in terms of being fully financed by client savings and funds from formal financial institutions The low savings mobilization may be attributable to the fact that many MFIs began their operations as channels of donor and governments funds and did not act as formal financial institutions offering deposit and other financial services.
In most countries, unregulated institutions are prohibited from mobilizing savings from the public but permitted to do so from their borrowers. The success of savings mobilization from low income people largely depends on the convenience of the service, security and returns from their savings. By serving a diversified group of people from different social and economic backgrounds, MFIs can serve more poor people than if they focused only to the poorest of the poor clients or in one social group (Campion and White, 2000, Christen and Drake, 2000). Campion and White (2000) noted that, by mobilizing savings, an MFI can increase the number of clients served, improve customer satisfaction, loan repayment and governance, and stabilize the sources of funds of MFIs. An increase in mobilisation of savings will allow MFIs to access locally available capital without being so dependent on external funds (donors). MFIs with both lending and savings products can produce synergies with regard to costs and additional knowledge about clients' financial behaviours. Christen and Drake (2000) points out that, MFIs mobilizing savings are likely to have better governance than MFIs with credit products only because they are not required to answer to government authorities. They often lack strong regulation and supervision because their priority is granting loans to specific group of borrowers. In contrary, the regulatory mechanisms of deposit-taking MFIs are very strict such that the MFIs adopt additional and higher management capabilities than exclusively lending MFIs. Savings mobilization requires strong protection of public savings therefore, MFIs need to have high management standards, especially risk and liquidity management capabilities.
Although many MFIs can secure funding from various market sources, they still cannot mobilize savings from the general public. Miller (2003) notes that, savings mobilization is costly and risky relative to other sources of financing. Therefore, instead of MFIs struggling to control costs associated with high risk, many have preferred to recapitalize their loan portfolios with donor funds and other concessionary loans. Campion and White (2000) argue that, the impact of savings mobilization on an MFI cannot be overstated. But to what extend savings mobilization solve the problem of capital shortage of MFIs? The MFI's funding problem stands as a stumbling block in the way of its growth and restricts its capacity of increasing outreach. Due to the inability to insure/protect clients savings deposited in an informal MFI, regulatory policies in most of the counties prevent these un-regulated institutions from collecting savings from the public. Hence, by licensing informal MFIs will allow them to access voluntary savings, the primary source of stable capital for most financial institution. Therefore, the objective of this paper is to focus on the role of savings in regulated MFIs. If it fosters financial growth of an institution and at the same time increases outreach by mobilizing savings.
The next section of this paper reviews evidence suggesting how and why poor households save. The third section reviews the importance of MFIs to mobilizing saving, how they do it and the challenges associated with mobilize savings from the poor and the general public. The fourth section highlights the benefits of savings mobilization while the final section identifies how outreach can be achieved by MFIs through savings mobilization.
THE CLIENTS PERSPECTIVE OF SAVING
Economists often explain that savings arise when consumption is postponed. They argue that poor people are not patient to postpone consumption because their basic needs are not always satisfied. They explain motives for saving in terms of the desire to smooth the income, for precaution motive, to purchase 'big ticket' items like consumer durable and for bequest motive (Rutherford et al, 2000). Rutherford (2000) suggests motives for savings, namely, life cycle needs, emergency needs and investment opportunities. These motives are not mutually exclusive and all these variables are involved in the saving preferences of both poor and wealthy people. He argues that poor people need access to microfinance because they frequently need to access large sums of money for different uses. This substantial amounts of money cannot be withdrawn easily from the daily income and require sacrifice (saving) and planning.
Armendáriz and Morduch (2005) suggested that there are two types of savings behaviours, low frequency savings, which refers to the steady, long-term accumulation in assets; and high-frequency savings, which refers to short-term investments aimed at smoothing consumption. They further challenged the assumptions that, poor households are not interested or too impatient to save. Instead, they argue that the poor face significant constraints that prevent them from saving, such as the lack of safe, secure, convenient institutions and effective risk management tools.
The most common forms of access to lump sums of money when needed is either through insurance, savings and loans (Rutherford 2000). Rutherford further argues that savings and loans are identical (mirror) though loans gives immediate accesses to the money plus interest, while savings are build over time. This is probably one of the reasons why most poor people prefer savings over credit. Poor people generally want to save at least during the year but not necessarily save in cash. Saving in kind like animals and grains is mostly common than cash savings. However, savings in kind is more risky (e.g. a cow can die) and from an economic point of view it is not divisible and liquid. An economy will prosper if people save cash in an MFI or banks (financial system) where the cash becomes available for others during the period the saver doesn't need the money. Trust and accessibility makes the intermediation of money possible through regulation of MFIs providing savings services.
Fiebig et al (1999) summarized the main determinants of savings decisions by economic actors as follows;
Transaction costs incurred on transforming surplus into savings,
The liquidity of the savings options available,
The return of the specific option - real interest rates,
Divisibility of savings;
The safety of the savings option,
Confidence and trustworthiness of the savings agents
The possibility of locking money away from relatives and friends,
The possibility of using savings to gain access to credit
Depending on the motive to save, certain factors become predominant in accordance with the factors stated above (Robinson, 1994) cited in Fiebig et al (1999); firstly, insurance against disease, sudden income losses, retirement and other contingencies. Secondly, safeguards against irregular income streams due to seasonal variations by savings during high-income periods to spend during low-income periods and finally, wealth accumulation to finance future household's long term investments.
Households with low, irregular income streams save in periods of high income to compensate during periods of low income (income smoothing). Motives for wealth accumulation focus on safety and return while motives for future investment need secure and immediate access of funds in the event of sudden investment opportunity.
II.1. Methods of Savings
Poor households save small and irregular amounts in kind or in cash. They have a diversified portfolio of saving, ranging from liquid forms such as money, gold and jewellery to less liquid forms such as chicken and pigs, cattle, land, etc. The decision by households on where and how to save constantly entails making trade-offs between the security, liquidity, and returns of each strategy. This also relates to money stuffed in a mattress as well as money placed in term deposit with a bank. Hulme et al (2009) and Rutherford et al (1999) identified some of the ways in which low-income households save and grouped them into informal, formal and semi-informal.
II.1.1 Informal Savings
This are savings at the home of the individual household, in cash and in kind such as goats, grains, and any other physical asset with either productive, protective and/or social value. Therefore, there is a thin line between savings, investment and consumption. The home of a poor household is probably the most probably place where to keep money, although it may not be very safe because temptation to use it is high, or because it can easily be stolen.
Also, households can choose to save in savings clubs, ROSCAs and ASCAs, informal schemes such as burial societies though not 'true' savings, but often treated as savings. Deposit collectors and money guards are used by households without any secure place to deposit their savings, hence entrust their savings with money guard and collectors. In some places, where money rotates frequently like markets and bus stations, deposit collectors visit people daily for a fee to collect savings.
II.1.2 Formal Savings
There exists a range of savings products from banks, cooperatives, post offices and these often require a minimum deposit balances. This requirement mostly excludes poor people and other ways of exclusion are physical and distances. Very few poor households deposit money in a bank, either because they have no bank close to their home, or because of conditions that are not adapted to their needs.
A study conducted in Uganda (Wright and Mutesasira 2000) cited in Microbanking Bulletin issue No.9, 2003, suggests that saving in the informal sector is highly risky. For 99% of the households surveyed, the average loss of savings in the informal sector was 22% in a single year. Therefore, services which are more secure than the informal alternatives will be attractive to depositors.
II.1.3 Semi-formal Savings
These are savings products from NGOs and other MFIs, both voluntary and compulsory savings acting as collaterals for loans. Rutherford et al (1999) notes that, the most kind of savings in MFIs are compulsory and their function is to act as collateral for loans. They argue that security built up plays a very important role in securing good repayment rates noting that in some cases fourth or fifth cycle borrowers can be holding loans with less face value than their savings balances. The savings are locked in for a given period because savings cannot normally be drawn down until a loan cycle is complete and these savings are relatively safe in the hands of the MFI.
Rutherford et al (1999) found that, MFIs savings satisfy many preferences of poor savers and clients save with MFIs with objectives of saving up for major expenditures in land, buildings and wedding ceremonies.
II.2. Types of Savings
Wright (1999) argues that, for effective mobilization of savings, MFIs should tailor their products to meet the expectations of the poor in terms of convenience, liquidity, and security. Savings mobilization changes the rule of the game as the client but not the lender selects the deposit taking MFI. The trust and confidence by the clients in an MFI needs to be backed by good service culture and efficient operations.
An MFI can not aim at long term sustainability without saving products. Mobilization of savings requires organizational design that is entirely different from credit products. The poor save for three main reasons, namely life-cycle needs, emergency needs and investment opportunities that may arise (Rutherford 2000).
There are two types of savings in microfinance industry generally categorised as compulsory savings and voluntary savings.
II.2.1 Compulsory Savings
Compulsory savings historically is a pre-condition for obtaining a loan and are designed to ensure that borrowers are able to meet their repayments. Compulsory saving is based on a common belief that the poor do not save (Robinson and Wright, 2002). It is believed that saving is the net difference between income and consumption and poor survive only on small income which they can't afford to save. The major limitation of compulsory savings is that it does not provide clients with an option for choosing to use the savings with some basic pressing needs (Rutherford et al, 1999). If compulsory savings can not be used even to save the life of the saver in times of distress, it is not worth saving. MFIs should leave to the poor clients the choice to make among basic needs that are equally competing (Wright 1999). Compulsory savings may not be seen as a service per se, but as part of the lending condition - collateral (Robinson and Wright, 2002).
Access to compulsory savings has been a contentious issue and has caused client-drop out in MFIs or increased default rates and to some extend animosity with the MFIs. The poorer the household, the more savings are important to assure food security, smooth consumption, manage risks, reduce vulnerability and meet other basic needs (Rutherford, 2000). Most MFIs require their clients to save a fixed amount on a regular basis, and savers cannot access their compulsory savings accounts until the loans are repaid in full or when they discontinue their membership. Few and large MFIs have offered compulsory savings as a means of funding their loan portfolios while the small MFIs largely depend on donor funds.
II.2.2 Voluntary Savings
In divergence from the compulsory savings, voluntary savings assume that, when clients are offered a range of savings services that meet the client's needs, they will choose to save. Demand for voluntary open-access savings among the poor exist and they are motivated and capable of saving when offered convenient and flexible savings and credit services (Wright, 1998). Robinson and Wright (2002) notes that, poor people can not survive without saving. Hence, the poor choose to go without fulfilling certain basic needs in order to accomplish other pressing needs. The poor require appropriate saving mechanism that shields their hard-earned income from encroachment by a variety of competing needs.
Most rural households often choose to save few coins from household daily budget while others save by selling agricultural produce, cow dung and charcoal, no matter how small their savings are, they exhibit management skills and planning behaviours of the poor. They often prefer to save in a flexible instrument that offers them a combination of security and access to withdraw their savings when they need (Islam et al, 2006).
A clear indication from these observations is that poor people do not save for the sake of saving, as is the case in compulsory savings. Instead, they save for specific purpose that they choose as priority which matches with their livelihood strategies. They have a range of basic needs that must be fulfilled but because of their limited resources, the poor have to choose particular basic needs and give away another equally pressing need. Hence, poor people target some pressing needs that are affordable with available resources.
THE MFI PERSPECTIVE OF SAVINGS MOBILIZATION
Before exploring why MFIs mobilize deposits and their challenges, it is worth taking an overview on what depositors actually value when saving. Firstly, services must be nearby and quickly accessible. Depositors do not require walking long distance or bus fare to deposit small amount of money. Secondly, depositors want their savings to be safe. In most cases, regulated MFIs are regarded by depositors to be safe because of the confidence they have on the supervisory authorities (Governments). Thirdly, in an emergency or when an opportunity presents itself, people want access to funds immediately to meet their urgent needs. And finally, as any rational investor, depositors appreciate a positive real rate of return on their deposits.
III.1. MFI Depositors as Quasi Shareholders
As the roles of agency and principal are reversed in the saving services unlike lending services, MFIs must convince depositors that they will handle their funds with care and provide them with benefits. Savings will be attracted when appropriate financial products and institutional arrangements are easily accessible. Savings mobilization may become an incentive to MFIs to improve performance and sustainability. More clients can be served by savings products than by lending, so that the introduction of savings products may improve the client outreach of MFIs. The introduction of savings facilities may induce more demand-driven services; hence improve efficiency and profitability for sustainability and expansion (Fiebig et al, 1999).
Otero (1994) cited in Fiebig et al (1999) proposes a gradual shift for MFIs from relying on donor funds to commercial sources of funds and, eventually, to public deposits. She argues that at an advanced stage of institutional evolution, savings mobilization will provide the largest share of capital. Robinson (2004) points out that savings mobilization is not feasible for every institution that started with lending. She points out that a mandatory evolution path that leads from donor-financed to fully pledge financial intermediation relying heavily on savings does not exist.
III.2. MFI Cost Management
Fiebig et al (1999) notes that, for MFIs to be sustainable, they must cover the costs for operations, loan loss, cost of capital (costs of savings and borrowed funds) and inflation with the income they generate. The small high frequency of deposits, administrative costs and deposit rates of interest often contribute to the specific costs of savings mobilization. Hence, MFI's income must be high enough and administrative and other costs low enough in order to operate profitably.
Savings mobilization allows the MFI to become more independent of donor funds. In addition, clients' feeling of ownership for the MFI increases. Since some of the lending funds come from the community (hot money), the borrowers might be more careful with the borrowed funds as compared to (cold money) funds from donors (Gardiol 2004).
Interest rate capping has proved to be a major disincentive for savings mobilization. Vogel and Burkett (1986) cited in Fiebig et al (1999) pointed out that a policy of real interest rates on deposits is not consistent with policies of low interest rate lending. The existents of interest rate ceilings for loans and deposits will reduce the spread to cover costs and thus often makes savings mobilization too costly. This often results in negative real interest, representing strong disincentive for depositors to save in MFIs. Low interest capital such as donor and soft loans funds also make deposit taking a costly and unattractive alternative.
The minimum reserve requirements by regulatory authorities (Central Banks) may significantly contribute to the cost of savings mobilization by freezing a portion of the capital which could generate income. Therefore, to mobilize savings cost efficiently, it requires cost consciousness approach as well as cost control based on appropriate management information systems (MIS).
III.3. Liquidity and Risk Management of MFI
Mobilising savings is much of a question of safety for an MFI. Therefore, a strong need to gain the confidence of depositors by reducing the agency-principal constraints between clients and MFIs is necessary. If MFIs do not offer financial services efficiently leading to reputational risk, a massive withdrawal of deposits may lead to a severe liquidity crisis or even erode the equity of the MFI and lead to technical insolvency. Factors, such as volumes, loans and deposits maturities, have implications for the liquidity management of MFIs. Liquidity managers need to monitor the matching between incoming deposits and outgoing loans. This is a difficult task for an MFI because savings represent largely small and liquid resources while assets are characterized by varied maturities periods. Poor households prefer liquid savings that are easily accessible, no restriction on withdrawals and require less minimum balances (Fiebig et al 1999).
Gardiol (2004) points out that the asset and liability management of the MFIs becomes much more complicated and costly when savings services are offered. The projections of cash inflows and cash outflows are essential for identifying liquidity gaps in a timely manner and to take into consideration provisions. Thus, higher management capabilities will be required and staff will need to be motivated to meet these challenges by introducing incentive structures and control measures. Abakaeva and Jasmina (2009) points out that, small deposits are very volatile and thus impose a high degree of liquidity risk on the MFI. Thus, funds from small deposits must be held in liquid investments.
BENEFITS OF SAVINGS TO MFIS AND CLIENTS
Visconti (2008) affirms that, saving facilities and not loans are critical for the poorest; hence "Savings first Credit Later" motto should be followed. The tendency to save in different forms is mostly high in rural areas; where a large portion of the potential clients may value access to safe and flexible saving services than credit. The rural poor households might be unable to save, especially in hard times like drought and floods. But savings are in most cases the best cushion for mere survival and represent a form of insurance against the future. Savings help the poor to smooth consumption, keeping it above a survival, when income is irregular and uncertain.
Islam et al (2006) summarized the benefits of mobilizing voluntary savings. For clients, they enumerated to include the following; (i) are affordable, flexible and easily accessible to the clients, (ii) encourage financial discipline and control, (iii) facilitate the accumulation of capital, (iv) enable clients to earn more when they save more, (v) have no hidden costs and build trust and confidence, (vi) provide security and offer access to other financial services, and (vii) help build a safety-net for emergencies.
While for MFIs who introduce voluntary savings, the key benefits are; (i) stable and less expensive source of funds, (ii) enable MFIs to diversify financial services to reach different market segments while remaining focused on their missions, (iii) help establish long-lasting relationships with clients, (iv) provide safety and security for clients' deposits, (v) contribute to asset building for low-income clients, and (vi) promote institutional profitability.
Kidder (200) affirms that, savings play a critical role and microfinance can address to some extend the needs of the poor, protecting as well as promoting income. Savings can play a significant role in providing funds for MFIs. Its importance as a means of servicing clientele and as a source of mobilizing funds for on-lending capital is gradually increasing. Saving provides security, convenience, liquidity and returns to the poor savers if this is not locked in by the MFIs.
Richardson (2003) cited in Microbanking Bulletin issue No.9 2003, noted that there is a direct linkage between personnel expenses, operating expenses, and the loan interest rate of an MFI, which must be set at a level to recover all of the institutional operating costs. Further, he concluded in his study that the salary expenses of credit unions are modest in comparison to other MFIs. While the principal volume of savings deposit funding does not come from the poorest of the poor. It comes from "upstream" member-clients who save because they want to save.
Types of Saving Products offered by MFIs
Savings Type
Client perspective
MFI perspective
Compulsory Deposits
Imposed by institution; client saves to be member/get loan
Low interest
Highly inaccessible (sometimes only available upon loan repayment or account closure)
May discourage voluntary savings
Provides funds and loan collateral
Significant but predictable demands on staff
Low interest rate
Voluntary Deposits
Unexpected needs or opportunities
Consumption smoothing
Store windfalls and remittances
Low/no interest
Does not require regular income
Large number of accounts, administratively intensive and potentially low profit
Heavy demands on staff, monitoring and information systems, liquidity management
Stable
Contractual Savings
Expected needs or opportunities
Encourages discipline
Higher interest
Problematic if irregular
Provides long term funds, larger balances, more profitable despite higher interest
Low administrative intensity
More volatile costs
Time Deposits
Expected needs or opportunities
Storage of lump sums•
Highest interest
Requires larger deposit/s
Inaccessible before term without penalty
Provides long term funds
Few accounts, high balances, most profitable
Low administrative intensity but needs asset liability management
Source: Hulme et al (2009) adapted from Hirschland (2005).
SAVINGS MOBILIZATION VERSUS OUTREACH
Christen et al (2000) defines outreach as the ability to provide quality financial services to large numbers of people, especially the poor. It is also an indicator of the institution's social mission to provide services to as many people as possible. Growth in contrast, needs to operate at a profitable level with sustained delivery of service without dependence on subsidized inputs. This represents the MFIs' commercial strategy of balancing the objectives of outreach and profitability. Robinson (2004) affirms that, provision of savings by an MFI can improve financial intermediation by providing a more stable source of funds for the MFI. These funds can contribute to increased outreach, autonomy from governments and donors, and a reduced dependence on subsidies.
The fear that poor depositors have more preference for liquidity and may make frequent withdrawals from their meagre savings, and may result in high transaction cost for the MFI may not always correspond to the livelihood strategies of the poor. This is because the poor often prefers to make targeted saving in order to meet certain basic need. Their preference is 'illiquid' savings that will enable them transform meagre savings in to lump sum. There is some evidence that the savings balances of low-income depositors tend not to fluctuate widely. A recent study conducted by Abakaeva and Jasmina (2009) found that under normal circumstances, low-income savings accounts move gradually and are not prone to volatility. Therefore, this makes liquidity management easier to manage as it gives MFIs adequate time to adjust to changes in deposit supply. In addition, the study notes that, a positive macro event do not lead to sudden surge in deposits. MFIs should invest in analyzing their particular deposit base to determine what proportion of its savings can safely be used for long-term lending.
A study by Aportela (1999) to assess the impact of increasing financial access on the savings of low income people showed that the expansion increased the average savings rate of affected households by 3 to 5 percentage points. The effect was even higher for the poorest households in the sample - savings rate increased by more than 7 percentage points in some cases. The expansion had no effect on high income households. The author concludes that low-income people save more of their income when they have access to financial instruments and that it is hard to rule out the possibility that the increase in savings represents new savings. Wisniwski (1998) cited in Miller (2003) found that the most successful institutions offered interest rates that increase with the savings account balance The low savings accounts balances are exempted from interest payments in order to compensate for higher administrative costs associated with these small accounts mobilized from poor people.
Results from a study conducted by Cull et al (2007) suggested that institutional design matters importantly in considering profitability and outreach trade-offs in microfinance. Village banks, which focus mostly on the poor, face the highest average costs and the highest subsidy levels. While individual based lenders earn the highest average profits, but do least on indicators of outreach to the very poor. Also they found some MFIs that have managed to achieve profitability together with outreach to the poor. However, they noted to be a few exceptions so far.
CONCLUSION
The review presented in this paper, regarding the savings mobilization capacity of the microfinance and the mechanisms that can respond most appropriately to mobilize savings, highlights the importance of savings for growth of MFIs. Research has found that, MFI savings products are as popular as lending. There has been a gradual shift since the early 1990's from lending and compulsory savings products to mobilization of voluntary savings from the poor. However, MFIs have challenges in introducing savings mobilization strategies that are driven by client needs. These strategies may include individual voluntary savings products with differentiated interest rates and campaigns that are client demand-driven. MFIs must design client-led products and policies that are easily developed and implemented. Diversifying the sources of funds to include a better portion of savings deposits require rigorous day to day monitoring of asset-liability management. Also, regulated MFIs need to build a human resource capital that is knowledgeable in the savings products and services; committed to exceptional customer service; and trained in cross-selling of products.
However, most MFIs are biased to quantity of outreach rather than quality of service. The demand to deliver better services to the poor is hindered by the MFIs traditional belief that the poor need to be forced to save. Therefore, discourages attempts to provide the poor with the essential financial services that they may require. MFIs should demonstrate that they can successfully move into the next level of providing client-driven savings and other financial services. For MFIs with both socially and profit oriented motives, to serve small depositors, they need to recognize that access means proximity, and sometimes in rural areas, proximity can require tradeoffs with the security, liquidity and flexible services offered.
